Garrett Bauer stood in a New York University lecture hall and warned 150 students not to emulate him. The day trader recounted illegally making millions of dollars over 17 years using corporate merger tips stolen by an attorney.
Students stopped checking their iPhones and stared at Bauer, 44. He told how the lawyer, Matthew Kluger, searched law firm files for tips to pass to a middleman, Kenneth Robinson, one of Bauer’s closest friends. They escaped detection by talking on disposable, prepaid mobile phones. Their scheme unraveled after the Federal Bureau of Investigation persuaded Robinson to make secret recordings of conversations.
“I’m here hoping you won’t commit the same crime I committed, insider trading,” Bauer told the students at NYU’s Stern School of Business in February. “I feel remorse. That’s why I’m here. It’s my way of trying to apologize to everyone for what I’ve done and try to make amends.”
Bauer described Robinson’s betrayal, his own arrest and five-night jail stay in April 2011, and guilty pleas by all three men in one of the largest insider-trading cases of the past decade.
Bauer and Kluger, 51, are scheduled to be sentenced today by U.S. District Judge Katharine Hayden in Newark, New Jersey. Bauer faces nine to 11 years in prison under federal guidelines, and Kluger faces 11 to 12 years.
Hayden will decide whether Bauer deserves an 11-year term like that given to Raj Rajaratnam, the co-founder of hedge fund Galleon Group LLC convicted of insider trading last year.
Rajaratnam was the most prominent of 66 people charged in an insider-trading crackdown by Manhattan U.S. Attorney Preet Bharara. All but seven pleaded guilty or were convicted at trial since 2009. Most got far less severe terms than Rajaratnam.
Bauer said he hopes that his “scared straight” message, delivered in 147 speeches since last fall at business schools, law schools, churches and synagogues, will move the judge to grant him leniency. Sentencing judges can consider whether a defendant has accepted responsibility and shown remorse for his acts.
“I’m not blind anymore,” Bauer said in an interview. “I see how wrong it was, how unfair it was to everybody else that’s trading. You get away with it once, and then you think you can get away with it every time. I almost never considered the question of getting caught. It was more a question of let’s figure out a way to make money and not lose money.”
Prosecutors in New Jersey say the Bauer scheme netted more than $37 million in illicit profits. The U.S. Securities and Exchange Commission said the three men made almost $32 million in the scheme’s last four years.
Bauer forfeited cash and property worth more than $23 million, including a 5,100-square-foot apartment on New York’s Upper East Side that he bought in 2009 for $6.7 million.
Kluger stole secrets at four prominent law firms from 1994 to 2011, making $502,500 in the scheme’s last four years. His lawyer says he deserves far less than a decade in prison. Robinson, 46, a mortgage broker, is scheduled to be sentenced tomorrow. He made $829,129 in the last four years, according to the SEC. As a cooperator, he will probably get much less time than the others.
All three men admitted Kluger passed secrets on about 30 corporate transactions to Robinson, who gave them to Bauer to buy shares in companies that included Sun Microsystems Inc., 3Com Corp. and Acxiom Corp. (ACXM) When deals went public, Bauer sold the stock and shared the profit with his partners, using cash.
Bauer spoke several times a week in person or via Skype at schools including Harvard University, Yale University, the University of California at Berkeley, the University of Texas, the University of Michigan and Duke University. He booked his own speeches, sometimes called “Confessions of an Inside Trader.”
Bauer gave the same basic narrative in two appearances observed at NYU, as well as at Cardozo Law School in New York, Drexel University in Philadelphia and a Rutgers University class in Jersey City, New Jersey. Bauer, lean at 5-foot-11 and 145 pounds, favors button-down shirts and khaki pants. He speaks rapidly in a nasal voice, lacing his account with jokes.
He recounted growing up in Melville, New York, studying economics at Clark University in Worcester, Massachusetts, and trading stocks for 20 years. He worked mostly at firms that provide space to traders, lend them money and share profits.
The illegal scheme began in 1994, when Kluger was an associate for the New York-based firm Cravath, Swaine & Moore LLP, Kluger and Bauer admitted in pleading guilty. Robinson and Kluger worked together from 1987 to 1991; Robinson and Bauer, from 1992 to 1994 at Weiss, Peck & Greer, a New York venture capital firm, the government said.
Bauer said at NYU that he didn’t clearly remember his first illegal trade in 1994. Prosecutors said one trade that Bauer made that year involved Johnson & Johnson (JNJ)’s acquisition of Neutrogena Corp.
The scheme began when Kluger called Robinson and said, “I’ve got something,” referring to inside information from Cravath, the FBI said in Bauer’s arrest complaint. Robinson said he would find a stock trader, and called Bauer.
“I knew I was breaking the law, but I didn’t know to what degree,” Bauer told students. “I got that phone call from Ken, I did the trade, and I made some money. It could have been $30,000 or $40,000. I had no money then.”
Kluger first passed tips to Robinson only on deals on which he worked as a mergers-and-acquisitions lawyer. As the scheme grew, he stole information from law firm computers about other deals, he admitted in pleading guilty.
At first the men bought an equal number of shares and split any profit equally, with Bauer giving cash to Robinson to divide with Kluger, Bauer said in an interview. Bauer said he later began buying greater amounts of shares than the other two. Bauer told students he met Kluger only once and didn’t remember his last name until reading it in the arrest complaint.
Bauer initially financed his legitimate trading with $25,000 drawn on his credit card, he said in an interview. He worked next to other day traders at various firms, including one owned by the Royal Bank of Canada, which extended him more credit as he traded more.
Kluger admitted stealing secrets from 1998 to 2001 at Skadden, Arps, Slate, Meagher & Flom LLP, based in New York, and from 2001 to 2002 at Fried Frank Harris Shriver & Jacobson LLP.
After a hiatus, the scheme resumed in December 2005 and ran until March 2011, when Kluger worked in the Washington office of Wilson, Sonsini, Goodrich & Rosati PC.
In a March talk at NYU, Bauer said that his legitimate trading prowess increased and the illegal trading became only a small fraction of his activity.
Bauer told students that he would execute 1,000 to 2,000 trades a year, with perhaps two or three based on illegal tips fed to him by Robinson. He could make or lose $1 million in a day, betting on U.S. stocks and turning them over quickly, he said. In 1999 alone, he said, he made and lost $50 million.
“I always had big swings in my account,” he said. “I could be up $10,000 and then up by $500,000. I really enjoyed finding that trade where you acted on it quicker than anybody else and then sold it to people who were too slow.”
Much of the illegal information he got was vague and led to purchases requiring him to hold shares or trade them several times over weeks or months, he said. Kluger’s tips often were unspecific and rarely led to instant profits, he said.
“Almost all of these trades were more complicated than they seemed,” he told NYU students in March. “I had 10 years of losses.”
Bauer made most of his illicit profits in the last years of the scheme, as his legitimate trading prospered. By 2010, he said, he had traded $8 billion through his account.
Prosecutors said he made $11.3 million in illicit profits by buying 4.9 million shares of Sun Microsystems Inc. before its acquisition by Oracle Corp. (ORCL) The government didn’t count the $9 million he lost by buying and selling Sun shares in the weeks leading up to the deal, he said.
A student at Drexel asked how he made $11 million without alarming regulators.
“I was always a really big trader,” Bauer said. “The SEC asked me questions a few times over the years. They would ask for confirmations of trades. It would be very difficult to find because on some days, I was in and out of millions of shares.”
Bauer lived modestly, rarely taking vacations, he said in an interview. His favorite restaurant was Houston’s, a chain that serves American classics. His only extravagances were his New York apartment bought four years ago, a house in Florida he bought for his mother and a $28,000 watch.
“It wasn’t about the money,” Bauer said. “It was just about the smart trade.”
The scheme ended when U.S. authorities approached Robinson, who had made two large trades on his own that attracted suspicion. He began taping Bauer and Kluger after the FBI raided his house in Long Beach, New York, on March 8, 2011. The FBI later seized $175,000 in cash from Robinson, according to the SEC.
Before the first recorded call, Robinson told Bauer that the FBI had searched his house and that he should destroy his prepaid mobile phone, Bauer said in an interview. A few days later, in a recorded conversation cited in the FBI complaint, Bauer told Robinson that he had broken the phone in half and dumped it in two McDonald’s restaurant garbage cans.
“I was so panicked,” Bauer told Robinson, according to an FBI affidavit. “I literally didn’t sleep that entire night.”
The two discussed the $175,000 in cash that Bauer had withdrawn on consecutive days from multiple ATMs at a Citibank branch. He used the money to pay Robinson, who was to split it with Kluger. Bauer said Robinson should burn the money to remove his fingerprints. Robinson later suggested running it through a washing machine.
In every talk to students, Bauer discussed how 20 FBI agents came to his apartment to arrest him and how they played the tapes for him, as well as his time in the Hudson County Jail.
He tried hard to show no emotion to violent criminals.
“Saying it’s a scary place kind of understates it,” he said. “It’s the scariest place on earth.”
The college senior who organized the NYU talk in February, Sameen Singh, said Bauer made a big impact on him and his friends.
“I was impressed by how human he was and how his friendships and relationships played a role in his crimes,” said Singh, who has graduated and will work for Morgan Stanley. (MS) “My friends were quite taken aback by how similar he was to them. He came from humble beginnings, and he’s not a deviant mastermind criminal. He’s just a regular guy.”
Bauer’s lawyer, Michael Bachner, said he submitted about 200 letters to Hayden expressing support or urging leniency. Mark Brennan, an adjunct professor at NYU’s Stern School who invited Bauer to lecture to two classes, wrote that students commented on the “strong deterrent effect” of Bauer’s message.
“Many remarked that it was the best experience of their entire time at Stern,” Brennan wrote to Hayden. “Immense good has already come from Garrett’s self-inflicted tragedy.”
Students saw how “someone, different from them only in age, ruined his life through a combination of greed, deceit, and carelessness,” Brennan wrote. “No ‘Scared Straight’ program could hope to be as effective as the one Garrett provided my two classes.”
At today’s court hearing, prosecutors will probably argue to Hayden that she should focus on the seriousness of the crime and impose a stiff sentence, while Bachner will argue that Bauer is a good person who changed for the better, said Lawrence Lustberg, a white-collar defense attorney in Newark who isn’t involved in the case. Judges must balance those factors in fashioning a sentence, he said.
“The challenges for the defense here are very real,” said Lustberg, of Gibbons PC. “This type of crime is viewed very negatively by society. Judge Hayden will be thinking about a sentence that’s the best thing for our society in a way that other judges might not. She’s going to try to do something that’s very creative.”
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